Deductibility of towboat periodic maintenance costs.

• Author: Madden, David

Recently, in Ingram Industries, Inc., TC Memo 2000-323, the Tax Court held that a towboat operator could currently deduct costs associated with periodic or cyclical service and maintenance of its towboat engines, in spite of the IRS's argument that its engine maintenance procedures were equivalent to overhauls.

The test for determining whether maintenance costs are currently deductible is whether the expenditures (1) adapt the property to a new or different use; (2) appreciably prolong its life; or (3) materially add to its value. On all three criteria, the Tax Court said, the taxpayer prevailed.

Background

At issue was whether a taxpayer could take a current deduction for (or needed to capitalize) the costs of its cyclical maintenance inspections of its towboat engines, which were typically performed every three or four years. Assuming proper maintenance, the taxpayer's towboat engines could continue operating safely, efficiently and profitably as part of the boat's propulsion system for up to 40 years. The taxpayer contended that it performed routine engine inspections to ensure that the towboat engines remained functional for their optimal useful lives.

The maintenance procedures involved cleaning and inspecting the engines to determine which parts were within acceptable operating tolerance, and which parts needed replacement and reconditioning. The engine inspection did not affect or disturb any other part of the towboat's main propulsion system (other than its main engines) or any equipment located in other parts of the boat. An engine was generally not removed from the towboat during an inspection and it was not necessary to put a boat in dry dock to perform inspection procedures. The average cost of an engine inspection was $100,000, while the cost to purchase a new comparable engine was $1.5 million and the cost of a rebuilt engine approximately $600,000.

No Legal Question Involved

The issue was whether the taxpayer's expenditures were deductible under Sec. 162 or capitalizable under Sec. 263(a). Regs. Sec. 1.162-4 provides that the "cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense." Reg. Sec. 1.263(a)-1(b) provides "[a]mounts paid or incurred for incidental repairs and maintenance of property are not capital expenditures." In this context, according to the court, "there is...